The global Covid-19 pandemic is not yet under control. It is traumatic for everyone, and there is a natural yearning to ‘get back to normal’. But it is already clear that we are facing the biggest economic downturn in the post-war period,1 which will leave deep scars. When the pandemic is over, policymakers will face a transformed landscape (Cliffe 2020). Economic policy will have to be reshaped around a fundamental review of objectives, instruments and institutions. A new political, social and environmental context will challenge efforts to restore economic growth. Indeed, our previous preoccupation with growth, mobility, and optimisation will likely give way to a new emphasis on equality, sustainability and agility.
Amid the economic and human trauma of the pandemic, we are reminded that necessity is the mother of invention. For economists, our newfound obsession with epidemiology is a painful lesson in the powerful and non-linear existential risks arising from humankind’s abuse of nature.2 But it is also a reminder that social and individual behaviours are also capable of rapid shifts, and that economic policy cannot be left solely to technocrats: it requires political and moral legitimacy to succeed. In building a post-pandemic policy framework, economists will need to continue to embed lessons from other disciplines (Wyplosz 2020).
Time to abandon the futile debate about ‘normalisation’
A first step is to abandon the futile ‘normalisation’ debate that dominated the last decade. We can now see that the increasingly unprecedented policy measures that fuelled the recovery that followed the Global Financial Crisis concealed a latent instability built on inflated asset prices and debt. That instability has been laid bare by the pandemic. We have been propelled even further down the road of radical monetary and fiscal stimulus measures to offset the ‘sudden stop’ in the global economy (Kapoor and Buiter 2020). But the sheer scale of the downturn makes it fanciful to imagine that we can put activity into hibernation. Many jobs and businesses will not survive, and massive debts will be incurred. Although much of that will fall on public sector balance sheets, and the carrying cost of that debt will remain low, this will be an ongoing headwind on growth unless there is a massive new experiment with monetisation.
Given the structural economic damage that we are incurring, even if we acquire the blessed relief of a Covid-19 vaccine next year, governments will not find it easy to unwind their emergency fiscal and monetary supports. Stressed and traumatised populations will be engaged in fierce debates over how burdens will be shared as many activities will not readily bounce back to where they were before.
The importance of inequality has been cast in a new light: it is not just a matter of fairness, it is also matter of social stability and public health security. Society’s dependence on often lowly-paid and vulnerable people providing vital front-line services will likely remain in the spotlight (Adams-Prassl et al 2020). Moreover, the enforced adoption of remote working may accelerate digitalisation in a way that squeezes the recovery in employment.
So although unemployment will plunge from the levels reached at the height of the lockdowns, it is likely to remain much higher than pre-pandemic levels. This may give momentum to calls for temporary income support to turn into a more permanent universal basic income or government job guarantees. There will be political pressure for more progressive taxation, not just on labour income, but business income as well.
Meanwhile, while some incumbent populist regimes may fail the competence test and hence at the ballot box, the pandemic has given a nasty twist to nationalism, which may allow other populists to gain power. Cross-border recriminations, notably between the US and China, and within the EU, will limit the scope for much needed international cooperation. This will make it harder to address global health and environment challenges and the fallout in the emerging world. In turn this will weigh heavily global trade and investment.
A further structural drag on growth will stem from the recognition of the dangers of over-optimising processes and supply chains. To cope with future shocks, businesses are likely to shift to from lean ‘just in time’ to bigger ‘just in case’ inventories. Businesses will be warier of single sources of supply or demand, allowing for a greater ability to switch activities or locations. This is likely to be reinforced by public policy designed to ensure continuity of supply of essentials such as food and medical supplies. Building greater business resilience will not just be operational, re-evaluating processes and crisis management, but structural, requiring a review of the strategic mix of products, assets, geographies, customers and suppliers. All of this will carry a cost, which will be further drag on economic growth in the next few years.
In general, the pandemic is likely to lead to a legacy of more conservative, risk-averse behaviour. Doubtless, mechanisms will be found to encourage people to gradually shed their reluctance to travel and engage with strangers. But bankruptcy and debt may have a more lasting effect in depressing the willingness to invest and encouraging businesses to hold more cash and reduce their leverage.
Fighting the growth headwinds calls for creativity and agility
Such risk aversion is another factor that suggests that the pandemic will weigh economic growth in the coming years. Yet while creating resilience for households and businesses will be costly, the long run benefits of avoiding or mitigating future catastrophes will be huge. Moreover, the challenges of the pandemic aftermath also present enormous opportunities to put the global economy on a more sustainable path.
Building resilience is not just about building bigger buffers – it also requires creativity and agility. Here far-sighted governments should seek to catalyse private initiatives to address societal challenges, capitalising the new-found respect for science and collaboration. While we now see the downsides of hyper-connectivity, we also see more clearly the potential for digital technology in connecting people and accelerating the development and propagation of ideas. Apart from the now obvious need for a public sector-led ‘Moonshot’ project to address global public health, society’s awareness of other externalities such as climate change could be harnessed to inspire other mission-oriented innovations (Mazzucato 2018). Grasping these opportunities will not be easy and may take many years, but the mobilising around them may help to sustain us through the pandemic.
Adams-Prassl, A, T Boneva, M Golin and C Rauh (2020), “The large and unequal impact of COVID-19 on workers”, VoxEU.org, 8 April.
Baldwin, R and B Weder di Mauro (2020), Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, a VoxEU eBook, CEPR Press.
Cliffe, M (2020), “Pandenomics – 15 ways that Covid-19 could change the world”, ING, 7 April.
Kapoor, S and W Buiter (2020), “To fight the COVID pandemic, policymakers must move fast and break taboos”, VoxEU.org, 6 April.
Landais, C, E Saez and Zucman (2020), “A progressive European wealth tax to fund the European COVID response”, VoxEU.org, 3 April.
Mazzucato, M (2018), The Value of Everything: Making and Taking in the Global Economy, Allen Lane.
Taleb, N. (2014), Antifragile: Things That Gain from Disorder, Incerto.
Wyplosz, C. (2020) ‘Economics catching up with medicine and natural sciences’, VoxEU.org, 3 April.
1. See the 9 April 2020 remarks of IMF Managing Director Kristalina Georgieva (see here).
2. See Richard Baldwin’s pocket lecture on Vox here and Taleb (2014).